Insolvency Oracle

Developments in UK insolvency by Michelle Butler

Monthly Archives: April 2015


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Are regulators reacting to the Insolvency Service’s gaze?

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In this post, I analyse the Insolvency Service’s annual review of IP regulation, asking the following questions:

  • Are the regulators visiting their IPs once every three years?
  • How likely is it that a monitoring visit will result in some kind of negative outcome?
  • How likely is a targeted visit?
  • Has the Complaints Gateway led to more complaints?
  • What are the chances of an IP receiving a complaint?
  • How likely is it that a complaint will result in a sanction?

The Insolvency Service’s reports can be found at: http://goo.gl/MZHeHK.  As I did last year (http://wp.me/p2FU2Z-6C), I have only focussed attention on the authorising bodies with the largest number of IPs (but included stats for the others in the figures for “all”) and only in relation to appointment-taking IPs.  Again, regrettably, I don’t see how I can embed the graphs into this page, so they can be found at: Graphs 23-04-15.  You might find it easier to read the full article along with the graphs here(2).

 

Monitoring Visits

  • Are the regulators visiting their IPs once every three years?

Graph (i) (here(2)) looks at how much of each regulator’s population has been visited each year:

Is it a coincidence that the two regulators that were visited by the Service last year – the ACCA and the Service’s own monitoring team – have both reported huge changes in monitoring visit numbers?  Of course, this graph also shows that those two regulators carried out significantly less monitoring visits in 2013, so perhaps they were already conscious that they had some catching-up to do.

I’m not convinced that it was the Service’s visit that prompted ACCA’s increase in inspections: the Service’s February 2015 report on its 2014 visits to the ACCA did not disclose any concerns regarding the visit cycle and I think it is noteworthy that ACCA had a lull in visits in 2010, so perhaps the 2013 trough simply reflects the natural cycle.  Good on the Insolvency Service, though, for exerting real efforts, it seems, to get through lots of monitoring visits in 2014!

The trend line is interesting and reflects, I think, the shifting expectations.  The Service’s Principles for Monitoring continue to set the standard of a monitoring visit once every three years with a long-stop date of six years if the regulator employs satisfactory risk assessment processes.  However, I think most regulators now profess to carry out 3-yearly visits as the norm and most seem to be achieving something near this.

The ICAEW seems a little out-of-step with the other regulators, though.  At their 2014 rate, it would take 4½ years to get around all their IPs.  The report does explain, however, that the ICAEW also carried out 32 other reviews, most of which were “phone reviews” to new appointment-taking IPs.  The Service hasn’t counted these in the stats as true visits, so neither have I.

 

  • How likely is it that a monitoring visit will result in some kind of negative outcome?

Graph (ii) (here(2)) lumps together all the negative outcomes arising from monitoring visits: further visits ordered; undertakings and confirmations; penalties, referrals for disciplinary consideration; plans for improvement; compliance/self-certification reviews requested; and licence withdrawals (3 in 2014).

It’s spiky, but you can see that, overall around 1 in 4 visits in 2014 ended up with some kind of action needed.

Above this line, ACCA and ICAEW reported the most negative outcomes.  Most of the ACCA’s negative outcomes related to the ordering of a further visit (20% of their visits).  The majority of ICAEW’s negative outcomes related to the request for a compliance review (16% of their visits).  Of course, ICAEW IPs are required to carry out compliance reviews every year in any event.  I understand that this category involves the ICAEW specifically asking to see and consider the following year’s compliance review and/or requiring that the review be carried out by an external provider, where weaknesses in the IP’s internal review system have been identified.

I find ICAS’ flat-line rather interesting: for two years now, they have not reported any negative outcome from monitoring visits.  The Service had scheduled a visit to ICAS in April this year, so I’ll be interested to see the results of that.

 

  • How likely is a targeted visit?

Let’s take a closer look at ACCA’s ordering of further visits (graph (iii) here(2)): is this a new behaviour?

The 2015 estimated figures are based on the outcomes reported for the 2014 visits, although of course some could already have occurred in 2014.

ACCA seems to be treading a path all its own: the other RPBs – and now even the Service – don’t seem to favour targeted visits.

 

Complaints

 

  •  Has the Complaints Gateway led to more complaints?

It’s hard to tell.  The Service’s first-year report on the Complaints Gateway said that, as it had received 941 complaints in its first 12 months – and by comparison, 748 and 578 complaints were made direct to the regulators in 2013 and 2012 respectively – “it may be that this increase in complaints reflects the improvement in accessibility and increased confidence in the simplification of the complaints process”.

However, did the pre-Gateway figures reflect all complaints received by each regulator or only those that made it through the front-line filter?  If it is the latter, then the Gateway comparison figure is 699, not 941, which means that fewer complaints were received via the Gateway than previously (or at least for 2013), as this graph (iv) (here(2)) demonstrates.

The stats for 2013 are a mixture: for half of the year, the regulators were receiving the complaints direct and for the second half of the year the Gateway was in operation.  It seems to me that the Service has changed it reporting methodology: for the 2013 report, the stats were the total complaints made per regulator, but in 2014 the report refers to the complaints referred to each regulator.

Therefore, I don’t think we can draw any conclusions, as we don’t know on what basis the regulators were reporting complaints before the Gateway.  We cannot even say with confidence that the number of complaints received in 2013/14 is significantly higher than in 2012 and earlier, as this graph suggests, because it may be that the regulators were filtering out more complaints than the Gateway is currently.

About all we can say is that marginally fewer complaints were referred from the Gateway for the second half of 2014 than for the first half.

 

  • What are the chances of an IP receiving a complaint?

Of course, complaints aren’t something that can be spread evenly across the IP population: some IPs work in a more contentious field, others in high profile work, which may attract more attention than others.  The Service’s report mentioned that the IPA is still dealing with 34 complaints from 2012/2013 that relate to the same IVA practice.

However, graph (v) (here(2)) may give you an idea of where you sit.

This illustrates that, if complaints were spread evenly, half of all IPs would receive one complaint each year – and this figure hasn’t changed a great deal over the past few years.

As I mentioned last year, I do wonder if this graph illustrates the deterrent value of RPB sanctions: given that the Service has no power to order disciplinary sanctions on the back of complaints, perhaps it is not surprising that, year after year, SoS-authorised IPs have clocked up the most complaints.  I believe that the IPA’s 2013 peak may have had something to do with the delayed IVA completion issue (as I understand that the IPA licenses the majority of IPs specialising in IVAs).  It’s good to see that this is on the way down.

I am also interested in the low number of complaints recorded by ICAS-licensed IPs: maybe this justifies their flat-lined actions on monitoring visits explained above: maybe their IPs are just more well-behaved!  Or does it reflect that individuals involved in Scottish insolvency procedures may have somewhere else to go with their complaints: the Accountant in Bankruptcy?  Although the AiB website refers complainants to the RPB (shouldn’t this be to the Gateway?), it also states that they can write to the AiB and it seems to me that the AiB’s statutory supervisory role could create a fuzzy line.

 

  • How likely is it that a complaint will result in a sanction?

Although at first glance, this graph (vi) (here(2)) appears to show that the RPBs “perform” similarly when it comes to deciding on sanctions, it does show that, on average, the IPA issues sanctions on almost twice as many complaints when compared with the average over the RPBs as a whole.  Also, it seems that IPA-licensed IPs are seven times more likely to be sanctioned on the back of a complaint than ICAEW-licensed IPs.  The ACCA figure seems odd: no sanctions at all were reported for 2014.

Of the 43 complaints sanctions reported in 2014, 35 were issued by the IPA: that’s 82% of all sanctions.  That’s a hefty proportion, considering that the IPA licenses only 34% of all appointment-taking IPs.  It is no wonder that, at last week’s IPA conference, David Kerr commented on the complaints sanction stats and stressed the need for the RPBs to be working, and disclosing, consistently on complaints-handling.

 

Overview

Finally, let’s look at the negative outcomes from monitoring visits and complaints sanctions together (graph (vii) here(2)).

Of course, this doesn’t reflect the severity of the outcomes: included here is anything from an unpublicised warning (when the RPB discloses them to the Service) to a licence withdrawal. And, despite what I said earlier about the timing of the Service’s visit to the ACCA, I am still tempted to suggest that perhaps the Service’s visits have pushed the regulators – the Insolvency Service’s monitoring team and ACCA – into action, as those two regulators have recorded significant jumps in activity over the past year.

The Service has a busy year planned: full monitoring visits to ICAEW, ICAS, CARB, LSS and SRA (although that may be scaled back given the decision for the SRA to pull out of IP-licensing), and a follow up visit to ACCA.  No visit planned to the IPA?  Perhaps that suggests that the Service is looking as closely at these stats as I am.


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New IP Fees Rules: Simples?

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With little more than benign overviews of the new fees rules out there, I thought I would examine them a bit closer.  What are the practical implications of the rules and do they contain any risky trap-doors?

My overriding thoughts are similar to those I have on the pre-pack changes: in an apparent effort to improve transparency, is the whole process becoming so unwieldy that it will turn IPs off altogether?  Maybe that’s the plan: make it so difficult to seek time costs that IPs switch to fixed/% fees.

As you know, the new rules take effect from 1 October 2015.  They can be found at: http://goo.gl/mekR5j.

Stephen Leslie, for Lexis Nexis, has produced a good basic summary of what they contain at: http://goo.gl/eqs9Aq.  R3’s Technical Bulletin 109 and Dear IP 65 also cover the subject.

S98s: same problem, different solutions

For CVLs, when should the liquidator set out his fees estimate?

R4.127(2A) will state that “the liquidator must prior to the determination of” the fee basis give the fees estimate (and details of expenses) to each creditor.  It seems to me that reference to “liquidator” requires the IP to be in office – so the fees estimate cannot be provided, say, along with notice of the S98 meeting.

But am I reading too much into this?  After all, R2.33 currently refers to pre-administration costs incurred by the “administrator”, when clearly the IP isn’t in office as administrator when the costs are incurred.  Therefore, maybe reference in the new rules to “liquidator” similarly is sloppy-hand to include “the person who would become liquidator”.  If that is the case, then maybe the expectation is that IPs will provide fees estimates along with S98 notices with a view to running S98 meetings along the same lines as they are at present.

Of course, then there’s the argument about how an IP is supposed to come up with a sensible estimate before he knows anything about the case.  Ok, he will have a better idea – but still not a great one – when the Statement of Affairs is drafted, but that’s little more than a few scribbles on a page, if that, at the stage when the S98 notices are issued.  So how long “prior” to the resolution should the liquidator “give” the information?  Given that S98s are pretty swift events anyway, would it be acceptable to send estimates the day before the S98 meeting..?

A confabulation of compliance consultants, especially with nothing more to guide us than a handful of new rules, is bound to generate a variety of proposed solutions.  Here are just three of them:

(i)         The return of the Centrebind

A Centrebind would overcome the problem of the IP being in office at the time of issuing the estimate and 14 days or thereabouts would seem sufficient to provide creditors with a reasonable estimate before the S98 meeting.

Of course, Centrebinds went out of fashion because of the limited powers the members’ liquidator has before the S98 meeting is held.  It’s not a great place to be as an office holder.  Do we really want to return to that practice wholesale?  And given the Cork Committee’s dissatisfaction over Centrebinds, would the regulators take a dim view if the practice were taken up again just to ensure that the IP could get his fees approved at the S98 meeting?  Some might argue that it’s the most practical way of working with the rules, but are there alternative solutions..?

(ii)        A second creditors’ meeting

This was my first thought when I read the rules: why seek a fees resolution at the S98 meeting?  Would it really be such a chore to convene another creditors’ meeting soon after appointment?

True, it would add another chunk of costs to the estate, but would IPs be criticised for taking this approach?  After all, how much of a solid estimate can an IP give before he truly knows what is involved in the case?  In my view, the costs of convening a second meeting would be entirely justifiable, as it seems to be the way the rules are pushing IPs.  Indeed, the rules as a whole are hardly cost-saving, given the additional work IPs will need to undertake to provide estimates and seek increases, if necessary later on.

Of course, in having a second meeting, IPs run the risk that the creditors already will have lost interest and they’re left with inquorate meetings and no resolution.  Also, as the liquidator (or an associate) will be chairman of the second meeting, they won’t be able to rely on the director-chairman’s vote or his use of general proxies.  However, the practice of looking to the director to approve the liquidator’s fees is viewed with scepticism anyway – many observers don’t recognise that, with so little creditor engagement, it’s sometimes the only practical way – so maybe it is a practice that we should be distancing ourselves from in any event.

(iii)       Fixed fees

This wasn’t my idea, but I see the attraction of it, particularly for “burial jobs”.

Given all the hassle of providing a detailed estimate of time costs, why bother, especially on jobs where in all likelihood the time costs incurred will outstrip the asset realisations net of other costs?  If liquidators were to seek a fixed fee, they would still need to provide, prior to the fees resolution, “details of the work the liquidator proposes to undertake and the expenses the liquidator considers will, or are likely to be, incurred”, but they could avoid providing the full estimated time costs breakdown.

Thus (provided that the IP doesn’t need to be in office as liquidator at the time), along with the S98 notices or just before the meeting, the IP can provide a pretty standard summary of tasks to undertake in any liquidation and set out the proposal to seek fees of £X.  If the SoA shows assets of, say, £15,000, the SoA/S98 fee is £7,500 of this and there are a few £hundreds of standard expenses, a fixed fee of £10,000 would seem reasonable to cover everything that a liquidator needs to do and, 9 times out of 10, there would be no need to seek an increase.

I guess that the proxy forms should list the proposed fee resolution in full, which would suggest that the IP knows what he wants to charge at the point of issuing the S98 notices.  As mentioned above, this would involve a degree of uncertainty, but for IPs working in the burial market, I can see that the risk is outweighed by the simplicity of this approach.  With Reg 13 ditched, IPs might not need to maintain time records* – what could be simpler?! – and they wouldn’t suffer the closure Catch 22 of billing time costs at a point when they haven’t yet spent the time closing the case.

But does this solution have legs for anything other than the simplest of jobs, where the IP would always be looking at a time costs write-off from the word go?  On its own, I don’t think so.  However, I don’t think it would be beyond the realms of possibility to devise a fairly standard formula for seeking fees on a combination of a fixed sum and a percentage basis.  This might help address any unexpected asset realisations, for example antecedent transactions or hidden directors’ loans.  Seeking percentage fees of such asset realisations would also deal with the concerns that it may be both impractical and indiscrete to propose fees estimates detailing what investigatory work is anticipated and how much that is likely to cost.

With several possibilities available, evidently S98s will require some thought and planning in readiness for 1 October.

* Although the Insolvency Practitioners (Amendment) Regulations 2015 are removing the Regulation 13 IP Case Record and thus, with it, the specific requirement to maintain “records of the amount of time spent on the case”, I do wonder whether an IP will be expected to continue to be prepared to meet the requirements of R1.55, R5.66 and Reg 36A of the 1994 Regs as regards providing time cost information to pretty-much any interested party who asks.  I know that no one asks, but with the continued existence of these Rules and Reg, does the abolition of Reg 13 really mean the abolition of time cost records in fixed/percentage fee cases?

Administrations: confusing

Of course, when tinkering with fee approval, it was always going to prove confusing for Administrations!  Here are a few reasons why:

Para 52(1)(b) cases

The current Act & Rules do not prescribe the process for seeking fee approval from secured (and preferential) creditors in Para 52(1)(b) cases.  Therefore, particularly where the Administrator has been appointed by a secured creditor and so will be reporting to his appointor outside of the statutory process, often a request is made very early on for approval for fees.

In future, if the Administrator is looking for time costs, he will need to “give to each creditor” the fees and expenses estimates before “determination” of the fee basis.  This indicates to me that an Administrator will not be able to seek approval for fees from a secured creditor before he has issued his Proposals to all creditors… unless he sends the estimates to all creditors in something other than his Proposals (unlikely)… or unless approval rests with other creditors in addition to his appointor – i.e. another secured creditor or also the preferential creditors – because it would seem to me that the basis of his fees is not “determined” until all necessary creditors have approved it.

This also means that an Administrator’s Proposals will have to include the fees and expenses estimates even for Para 52(1)(b) cases.  I can see some sense in this, as unsecured creditors can always requisition a meeting to form a committee that will override the secureds’/prefs’ approval of fees.  However, it seems quite a leap in policy, given that the full SIP9 information is not currently required in Proposals in these cases.

Changed outcomes

I am not surprised that the Service has introduced a new rule to deal with some Administrations where the prospective outcome has changed so that a different class of creditors is now in the frame for a recovery.  The Enterprise Act’s dual mechanism for obtaining fee approval depending on the anticipated outcome was always meant to have ensured that fees were approved by the party whose recovery was reduced because of the fees.  It’s true that the Act & Rules often do not deliver that consequence (not least because Para 52(1)(c) cases aren’t dealt with at all properly), but that has always been touted as the policy objective.

Sure enough, Dear IP 65 repeats this objective: “the new provision revises to whom the office holder must make a request or application in such circumstances [as described below] to make sure that such matters are determined by parties with the appropriate economic interest”.  Yes, but does it..?

In future, if fees have been approved on a Para 52(1)(b) case by secureds/prefs and the Administrator wants to draw fees in excess of the previous estimate, but he now thinks that a (non-p part) unsecured dividend will be made, he will need to seek approval from the unsecured creditors.  Fine.

However, there is no new provision to deal with outcomes changing in the other direction.  For example, if an Administrator originally thought that there would be a (non-p part) unsecured dividend – so he sought approval for fees by a resolution of the unsecured creditors – but now he thinks that there won’t be a dividend and maybe even that the secureds/prefs will suffer a shortfall, to whom does he look for approval of fees in excess of the previous estimate?  From what I can see, he will still go to the unsecured creditors.

[Theoretically, he might be able to issue revised Proposals in which he makes a Para 52(1)(b) statement, so that the secureds/prefs have authority to approve his fees.  In any event, the changed outcome might make revised Proposals appropriate.  But then what?  Would that result in the basis of his fees not being “determined” with the consequence that he has to issue fees and expenses estimates again to every creditor before he can seek the secureds’/prefs’ approval to the basis of his fees?]

Given that the OFT study concluded that secured creditors are so much better at controlling fees than unsecureds are, why not hand the power to secured creditors automatically by means of the new rules when the outcome deteriorates, in the same way that they shift the power automatically from the secureds to the unsecureds when the outcome improves?

Transitional provisions

This is more just a headache than confusing: one more permutation to accommodate in systems.

In general, the transitional provisions are designed so that, if an IP takes office after 1 October 2015, he will need to go through the new process to get his fees approved.  In effect, they treat Para 83 CVLs as new appointments, so the new rules disapply R4.127(5A) for Para 83 CVLs beginning after October in relation to Administrations that began before October.  Thus, Para 83 CVL Liquidators will not be able to rely on any fee approvals in the Administration.  Instead, they will have to go through the new process.

However, R4.127(5A) kicks back in for Para 83 CVLs following Administrations that begin after 1 October.  This is because, in these cases, the Administrator will have already gone through the new process in order to get fee approval, so it seems reasonable that the Liquidator can continue to rely on this approval.  Of course, the Liquidator will be subject to the Administrator’s fee estimate, so if he wants to draw fees in excess of the estimate, he will need to go through the new process for approval.

It might seem a bit much to expect an Administrator to be able to estimate a subsequent Liquidator’s fees.  For once, I think that the Insolvency Service has been sensible: the rules state that the Administrator’s estimates may include any subsequent Liquidator’s fees and expenses, not must – it’s good to see office holders left with a choice for a change!  Thus, where the Administrator’s estimates have not provided anything for the Liquidator, an increase in the estimate is probably going to be one of his first tasks.

I wonder if an Administrator’s estimate might be devised so that, if he has not used up his estimate in full, then it can be treated as the Liquidator’s estimate..?  I suspect the regulators might take a dim view of that…

Compulsory Liquidations: inconsistent treatment?

I didn’t spot this one, but it was passed to me by a Technical & Compliance Manager (thank you, D).

As explained above, the transitional provisions seem to be designed so that the critical date is the date of the IP’s appointment, rather than the more commonly-used insolvency event date.

It gets complicated, however, when one tries to define every way that an IP can be appointed.  For compulsory liquidations, the transitional provisions cover appointments (post-1 Oct) by: creditors’ meeting (S139(4)); contributories’ meeting (139(3)); and the court following an administration or CVA (S140).

What about appointments by the Secretary of State (S137)?

I cannot see why these appointments should be treated differently.  Does this mean that no Secretary of State appointments will be subject to the new rules?  Or does it mean that all SoS appointments will be subject to them..?

I have asked the Insolvency Service for comments.

Practical difficulties

Of course, there are practical difficulties in devising fee and expenses estimates for each case.  The Impact Assessment for the new rules (http://goo.gl/vCOsnS) state: “Based on informal discussions with IPs and internal analysis by the Insolvency Service it has been estimated that the costs of learning about the new requirements will be relatively moderate as in many cases IPs produce estimates of the work they will be undertaking for their own budgeting purposes. Therefore the industry has the pre existing infrastructure in place to produce estimates and so there will no additional set up costs for business. All the information that will be needed for the estimates is already available to IPs so there will be no additional costs of gathering information” (paragraph 34).  What nonsense!  Even if IPs do estimate fees at the start of a job, they are little more than finger-in-the-air estimates and are way less sophisticated than the new rules envisage.

The Insolvency Service followed up this nonsense with the suggestion that it would take IPs 1 hour to get their systems up to scratch for the changes!  Personally, I feel that such a fantasy-based statement is an insult to my intelligence.

In relation to generating fee and expenses estimates, the Impact Assessment states: “The work is likely to be an administrative task extended from the existing practice to produce estimates for business planning so we believe the work is likely to be completed by support staff within practices. It is estimated that the task will take around 15 minutes per case” (paragraph 36).  This is just so much nonsense!

Anyway, back to the practicalities…

The Insolvency Service has explained that it is working with the JIC to tackle “the key challenge… to present this information [the fees and expenses estimates] in a clear, concise format that the creditor, i.e. the end user, finds both useful and informative” (Dear IP 65, article 55).  I guess we are talking here about a revised SIP9.

Given that it has taken the IS/JIC ten months (and counting) to complete a revised SIP16 following Teresa Graham’s report, how close to the 1 October deadline do you think we’ll get before we see a revised SIP9?  I know that the SIP16 revision has been dependent on the pre-pack pool being set up, but I reckon it’s all going to get a bit tense towards early autumn.

The issue is: do we gamble now on what we think the regulators will want or do we sit and wait to see?  The new rules require that time costs fee estimates specify:

“details of the work the insolvency practitioner and his staff propose to undertake… [and] the time the insolvency practitioner anticipates each part of that work will take”. 

Is it a safe bet to assume that the regulators will expect a SIP9-style matrix, classifying work as Admin & Planning, Investigations, Realisation of Assets etc.?  Will they also want the estimate to list, not only the total time costs per work category, but also the time costs per staff grade, i.e. the hours plus time costs?  Will they also want a greater level of detail, say breaking down the Admin & Planning etc. categories into sub-categories, for cases where time costs are anticipated to exceed £50,000?  Conversely, what level of detail will they expect for cases with time costs estimated at less than £10,000, given that at present SIP9 requires only the number of hours and average hourly rate to be disclosed for fee-reporting purposes? Finally, will these expectations be, as they are now, set out as a Suggested Format, or will there be required disclosure points?

Given that the rules refer to “each part of that work”, personally I would get cracking now to devise systems and models to produce fees estimates styled on the table in the SIP9 appendix.  I might run some analyses of past cases to see if I could come up with some sensible tables for “typical” cases, maybe examine some outliers to see, for example, how much it costs to realise some difficult assets or pay dividends, depending on the class and number of creditors.  Setting up such templates and systems to capture the key elements of each case is going to take time.  We have less than six months.

Not quite so urgent, but just as systems-based, is the need to design mechanisms for monitoring fees estimates.  It would be useful to know if the major software-providers are designing tools to compare fees estimates to fees taken – much like the bond adequacy review – and whether these tools can be used to identify cases where fees are approaching estimates.

And of course, the rules provide loads more work on creating and revising standard documents and checklists *sigh*!

Finally, an obvious practical difficulty will be ensuring that creditors are still sufficiently engaged some way down the insolvency process to put pen to paper and approve additional fees.

Techies’ corner

I know that the following points are nit-picky, but, as we’re talking about fees approval, I felt that they were important to get right.

When does remuneration arise..?

We’ve had drummed into us that “remuneration is charged when the work to which it relates is done” (R13.13(19)).  This definition was introduced with the new progress reports so that IPs disclose time costs incurred, not just remuneration drawn.

But how does this definition fit with the new rules that state that “the remuneration must not exceed the total amount set out in the fees estimate without approval”?  Does this mean that we need to ask creditors to approve an excess before the time costs are incurred, i.e. before the work is done?  And what if the IP is prepared to write off the excess, does he still need to seek approval?

Yeah, I know, it’s pretty obvious what the intention of the rules is, but I asked the Insolvency Service anyway.  Their lawyer’s view was that the “court would resolve any tension” between the rules by coming to the conclusion that the new rules make it “sufficiently clear that the office holder is permitted to incur additional fees above the level of the estimate, before securing further approval”, because the same rules state that a request for approval must specify the reasons why the office holder “had exceeded” (or is likely to exceed) the fees estimate.  It’s the drawing down of additional fees that would be prohibited without approval, not the incurring of them.  Fair enough.

What “creditors” should be asked in Para 52(1)(b) Administrations..?

I have drafted the article above on the basis of the Insolvency Service’s answer to my second question, although I have to say that I think they could have done a better job at drafting the rules on this one.

New R2.109AB(2) explains which party/parties the Administrator should approach for approval of fees in excess of the estimate.  There are three choices, dependent on who fixed the fee basis in the first place:

“(a)  where the creditors’ committee fixed the basis, to the committee;

“(b)  where the creditors fixed the basis, to the creditors;

“(c)  where the court fixed the basis, by application to the court”.

My question was: if a secured creditor alone fixed the basis, who should approve the excess?  It can hardly be said that “the creditors” approved the basis.  Also, given that the OFT study had concluded that secured creditors seem to control fees quite adequately, perhaps it was felt that there was no need to add another layer of control in these cases…

The Insolvency Service’s response was: “it would be for the secured/preferential creditors to approve if the para 52(1)(b) statement held good. We think the wording of the Rules is sufficiently clear in this regard”.  Well, I’m glad I asked!

 


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Regulatory Hot Topics: (2) Administration Technicalities

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I’m itching to blog about the new legislation, but that’s all a bit taxing so close to the Easter weekend.  Therefore, I’ll continue with my summary of points made in the R3 webinar.  This week: Administration Technicalities.

For my clients, this post may sound all very familiar, as I’ve pulled most of this from my last newsletter.  However, I’ve added some new points about the SBEE Act at the end of this post.

Matthew Peat and I agreed that failing to meet the statutory provisions for administrations is one of the most common issues identified on review visits.  I’m not at all surprised, as the legislation is extraordinarily (and in many respects, I think, unnecessarily) complicated… and it’s only going to get even more complicated with the Small Business, Enterprise & Employment Act and the Insolvency (Amendment) Rules 2015 (the IP fees rules) – but that’s for another day.

Areas that seem to cause difficulties include:

Pre-administration costs

It should be remembered that the requirement to disclose in the Proposals (and seek approval of any unpaid) pre-administration costs relates, not only to the charges of the IP, but to other costs incurred pre-appointment such as the solicitors’ or agents’ fees.

It is also evident that the RPBs do not believe that estimates of pre-administration costs comply with the Rules and they expect you to contact third parties and establish the quantum of their pre-administration costs in order to disclose them properly in the Proposals.  Also, if any payments from the estate to third parties exceed the (estimated) pre-administration costs as they appeared in the Proposals, do not be surprised if an RPB monitor suggests that the excess is unauthorised.

Most IPs have cottoned on by now that the Rules specifically state that approval of pre-administration costs does not form part of the Administrator’s Proposals (even though R2.33 requires that the Proposals include details of pre-administration costs).  However, there seem to be still the odd flawed template or two in circulation that do not present a separate specific resolution for the approval of pre-administration costs.

Statement of affairs

There have occasions when a statement of affairs (“SoA”) has not been submitted by the director(s), but the Proposals haven’t included the alternative required by R2.33(2)(g) of details of the financial position of the company (which usually takes the form of the Administrator’s own estimated SoA).

It is perhaps worth adding that this rule also requires a list of creditors (names, addresses, debts and any security) – whether or not the directors have submitted an SoA – and “an explanation as to why there is no statement of affairs” (although personally I cannot see that any explanation is going to be likely, other than “it has been requested but the director has not yet provided one”, particularly where Proposals have been issued swiftly after appointment).

How the purpose of the administration is to be achieved

If the Proposals explain that the Administrator thinks that the second administration objective is achievable, then the Proposals should explain why you believe that the result for creditors as a whole is going to be better than if the company were wound up (without first having been in administration).

Statement of expenses

Progress reports – not only in administrations, but in all other cases (apart from VAs and Receiverships) – all need to include a statement of the expenses incurred by the office holder during the period of the report, whether or not payment has been made in respect of them during the period.

It is important to remember that this includes more than simply the office holder’s time costs and disbursements, so this again means that solicitors, agents etc. need to be contacted to establish what is on their clocks.  Also, do not forget items such as insurance premiums and statutory advertising.  In addition, the Rules do not set a de minimis: all and any expenses incurred must be disclosed.  There have been some suggestions that the regulators might take a proportionate view of the disclosure of expenses, but personally I wouldn’t risk it.

Extensions

If seeking an extension via creditors’ consent, make sure that you approach the right creditors.

In every case, you will need to obtain the consent of all the secured creditors.

Whether you approach also the preferential or unsecured creditors as a whole will depend on what you wrote in the Proposals: per Para 78(2), if you have made a Para 52(1)(b) statement, you need to approach preferential creditors, if you think that a distribution to them will be made.  This is different from seeking approval to fees: in that case, under R2.106(5A) you need to seek preferential creditors’ approval to fees, not only if you intend paying a distribution, but also if you have paid a distribution.

However, events could have moved on since you issued the Proposals: by the time you contemplate an extension, the anticipated outcome might have changed.  What if your Proposals did not include a Para 52(1)(b) statement, but now you don’t think that a dividend will be paid to non-prefs?  Who do you approach for approval of an extension?

Assuming that your Proposals have accommodated alternative outcomes (such that you don’t believe you need to issue revised Proposals), Para 78 still indicates that whether you go to prefs or unsecureds in general depends on what you stated the anticipated outcome was in your Proposals.  However, to show consideration for the apparent spirit behind the provisions, it would seem prudent to consider also which creditors are in the frame at the time that you seek an extension, to ensure that you achieve the requisite majority from them too.

Extension Progress Reports

Whichever way you seek consent to an extension, you will need to issue a progress report (which is one reason why I am nervous about including in Proposals the power for the Administrator to extend without further recourse – because Proposals are not a progress report).  The usual one month deadline applies to these extension progress reports, so if you have only asked secureds/prefs to consent to the extension, make sure that you circulate the progress report to all other creditors – as well as send a copy to the Registrar for filing – within the month.

The same goes for court extensions: you will have produced a progress report to accompany your court application and, in the event that the court does not grant your extension before the month-end, you will need to send a copy of the report to all creditors and for filing and then send another circular (for the Notice of Extension) once you have received the order for the extension.

Finally, remember that the 6 month cycle for progress reports is counted from the period-end of the last report.  Therefore, where a progress report to accompany an extension request has been issued – which can be at any time – diaries will need changing so that the next progress report is 6 months after that report (i.e. no longer 6-monthly from the date of appointment).  This can prove a nightmare for automated diary systems… and, as you need to provide sufficient lead-time before any extension period ends in order to consider whether to apply for a further extension, make sure that you don’t leave diary prompts for progress reports too tight on the 6-month deadlines.

Exits

RPBs appear to be expecting decisions over exit routes to be clearly and contemporaneously evidenced.  This is also valuable in the event that things do not turn out the way you had hoped, e.g. where you moved to CVL because you had thought that there would be sufficient realisations to pay a dividend to unsecured creditors, but something happened later to scupper that outcome.

I also understand that it is generally accepted that Para 83’s reference to an Administrator thinking that a distribution will be made to unsecured creditors is a reference to non-preferential unsecured creditors only.  Thus, if you are nearing the end of the administration and you think that only a preferential distribution will be paid, you will need to seek an extension and pay it through the administration.  Alternatively – and if HMRC (or, of course, any other creditor) has modified the Proposals so that the exit must be by liquidation – you will need to seek a compulsory winding-up order.

Small Business, Enterprise & Employment Act 2015

I couldn’t resist one point on this new Act.  Although some items come into force on 26 May 2015, there are no transitional provisions (yet).  In other words, unless a new Order changes things, the provisions will apply to all existing insolvency appointments, not only future ones.

The Act amends Para 65 to the effect that, from 26 May 2015, administrators may pay a prescribed part dividend without the court’s permission.  However, the Act also amends Para 83 so that it will read that an administration may move to CVL only where the administrator thinks (“that the total amount which each secured creditor of the company is likely to receive has been paid to him or set aside for him” – no change there – and) “that a distribution will be made to unsecured creditors of the company (if there are any) which is not a distribution by virtue of section 176A(2)(a)”, i.e. a prescribed part distribution.  In other words, from 26 May 2015, the Para 83 move to CVL cannot be used to pay a prescribed part dividend (unless you also think there is going to be a non-prescribed part dividend as well).

Thus I would strongly recommend that you revisit your standard Proposals template to make sure that they do not run contrary to the post-May position: you do not want to be stuck with approved Proposals requiring you to exit by CVL to pay a prescribed part dividend, when the Act won’t allow you to do it.  Having looked at some standard Proposals, I reckon many will have sufficient wriggle-room to avoid you having your hands tied, but it would be worth checking the Proposals of any cases where you anticipate a prescribed part dividend: you still have a month or so during which you can do a Para 83 move to CVL before the Act takes effect.

My thanks to Deborah Manzoori and Jo Harris for pointing out this issue to me.

My thoughts on more wrinkles in the new legislation will follow soon.  In the meantime, have a lovely long weekend.